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Help! Hacker zapping ME BIG TIME!

Getting Worse: Old computer, Win 98, no updated anti-virus or firewall. A program needed a downloadable patch that took 4 hours. Left computer to do its thing. Restarted the computer. Upon logging back online, AOL account fired off an e-mail. E-mail came back to our inbox as if it came from someone we knew. The someone we knew had worked for us, was our former system administrator, had left the country, and was under investigation by authorities. Ten days earlier, our AOL account logged on and sent hundreds of e-mails as well. Could not find any trojans on computer. The e-mails that were sent did not come from us, but have our IP address. We DIDN'T send them!?

If someone knows your IP address and password, can they use your computer to send e-mails anywhere that have your IP address? Is this possible thru hacking?

A random check now reveals that our "File Created" dates have been changed. On some machines, whole document files have been changed. On others, random dates have been changed. Also, there are documents added to our system that aren't our work product.

An outside hacker can take over your machine, use it for e-mailing with your IP address, get your financial info, and change your files around? Yes or No?

Can someone also manipulate your files by hacking into your system OR individual machine as well? Yes or No?

Last thing, most of the problems are coming thru our former system guy's machine. Is it possible that since it was his machine he is accessing it externally with ease because of some program he's got in there that we don't know about? Should I just yank his machine until we find the problem?